Combining Value and Earning Surprises for Outsize Returns

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 |  Includes: INDM, KAI, KBAL, KND, OSP, PKD, PNM, QLTI, RGS, SALM, SCVL, SRT, SUSQ, TBBK, WL, WSTL
by: Scott's Investments

Below is another great study profile at cxoadvisory.com with regards to value stocks and positive earnings surprises. The study was conducted by Zhipeng Yan and Yan Zhao and CXO summarizes below:


Using stock price, earnings estimate and accounting data for a broad sample of firms over the period June 1984 through December 2008, they find that:

  • Value stocks are less volatile than growth stocks around earnings announcement dates.
  • Value stocks exhibit much larger positive drifts than growth stocks after positive earnings surprises and positive earnings announcement abnormal returns.
  • Growth stocks exhibit much larger negative drifts than value stocks following negative earnings surprises and negative earnings announcement abnormal returns.
  • A trading strategy that is long value stocks with both positive earnings surprises and positive earnings announcement abnormal returns and short growth stocks with both negative generates annualized size-adjusted returns of 16.6% to 18.8% (before trading frictions). Most of the return comes from the long side.

CXO concludes:

In summary, investors may be able to achieve abnormal returns by combining value and earnings surprises, with most of the benefit coming from value stocks with positive earnings surprises and positive earnings announcement abnormal returns.

How could an investor apply this in practical terms? A simple screen for value stocks with recent earnings surprises would be the easiest place to start. I used Zacks Premium screener for the screen below, primarily because they have the most robust screener I have used for earnings surprises.


In addition, I have further filtered the stocks to include small cap stocks (defined here as a market cap of less then $1 billion). There are rationals (such as here and here) for screening for small caps versus the entire market, but one could apply the value/earnings surprise theory to stocks of all sizes.

The screen criteria are below, along with the results using data collected at the end of last week:

  • Last EPS Surprise (%) >= "20"
  • Price/Book <= "1"
  • Last Quarter's EPS >= "0"
  • Twelve Month Trailing EPS >= "0"
  • Avg EPS Surprise (Last 4 Quarters) >= "20"
  • Previous EPS Surprise (%) >= "20"
  • Average Volume (20 Days) >= "25000"
  • Market Cap (millions) <= "1000"

The screen results:

Company Name Ticker Zacks Rank Trend Last EPS Surprise (%) Price Avg EPS Surprise (Last 4 Quarters) Price / Book
INFINITY PPTY IPCC 3 Here 46.94 39.11 62.65 0.9
CABELAS INC CAB 2 Here 61.11 12.98 50.42 0.9
CELERA CORP CRA 3 Here 100 6.3 733.33 0.87
AMER RAILCAR ARII 3 Here 150 10.7 121.25 0.68
INFORMATION SVC III 1 Here 900 3.52 433.33 0.85
ATLAS AIR WORLD AAWW 3 Here 22.81 28.53 30.23 0.81
FIRST INDL RLTY FR 3 Here 21.28 4.99 117.13 0.23
WINTHROP REALTY FUR 3 Here 118.75 9.01 52.89 0.72
KADANT INC KAI 1 Here 126.32 13.91 92.29 0.87
BANCORP BNK/THE TBBK 2 Here 500 5.27 182.5 0.54
UTD AMER INDEMN INDM 2 Here 153.33 6.85 53.83 0.51
OSG AMERICA LP OSP 4 Here 250 10.2 150.21 0.37
SALEM COMM SALM N/A Here 550 3.89 172.5 0.47
PARKER DRILLING PKD 3 Here 300 4.98 145 0.96
PNM RESOURCES PNM 3 Here 53.66 11.29 88.53 0.55
QLT INC QLTI N/A Here 25 3.82 106.25 0.67
STARTEK INC SRT 4 Here 20 5.89 68.39 0.76
SUSQUEHANNA BSH SUSQ 3 Here 175 5.5 71.33 0.28
KINDRED HLTHCR KND 3 Here 400 15.5 128.07 0.64
WILMINGTON TRST WL 4 Here 171.43 12.97 127.86 0.91
REGIS CORP/MN RGS 2 Here 38.1 15.99 32.61 0.92
KIMBALL INTL B KBALB N/A Here 166.67 7.25 116.03 0.7
SHOE CARNIVAL SCVL 2 Here 300 15.33 63.13 0.94
WESTELL TECH-A WSTL 4 Here 33.33 1.18 66.67 0.98
Click to enlarge

Author's Disclosures: no positions